Sunday, December 5, 2010

Inflation Targeting paper: new installment

I have just updated my January 2010 IMF Working Paper with data available through November and this Tuesday I will present it at the Macroeconomics seminar of Johns Hopkins University.

The results in this version of the paper are very striking and I have not fully understood their meaning (is it luck? Is it monetary policy? Or some omitted variable?). There seems to be a positive effect of an inflation targeting regime on economic performance since August 2008. This effect is robust to controlling for several variables that the literature has established as important determinants of post-crisis economic performance (short-term external debt to GDP, post-crisis changes in terms of trade and pre-crisis growth in private credit and current account balance).

Comments are welcome. The link is here.

Inflation Targeting and the Crisis: An Empirical Assessment
Irineu de Carvalho Filho
December 3, 2010

This paper appraises how inflation targeting countries fared during the current crisis relative to their peers, thereby establishing the stylized facts to guide and motivate future research. Since August 2008, IT countries lowered nominal and real policy rates than other countries; were less likely to face deflation scares; and IT currencies depreciated sharply in real terms but their risk assessment by markets did not deteriorate. I could not find any difference in unemployment dynamics but advanced IT countries had stronger industrial production growth. Finally, I estimated a reduced form econometric model for the post-crisis change in GDP growth rates, finding a positive effect of IT. This effect is robust to inclusion of other determinants of growth performance after the crisis, such as short-term external debt to GDP, the growth performance of trading partners, post-crisis changes in terms of trade and pre-crisis growth in private credit and current account balance.

UPDATE:When preparing my seminar presentation, I combed through the data and caught a few data mistakes (for one major country I had read the nominal instead of real GDP series). Therefore I spent the last few hours updating the tables and charts. No change in the message though. The link to the file takes you to the updated paper.

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